Arbitration: Coverage dispute headed to arbitration

Although federal courts have interpreted a Virginia statute to “void mandatory arbitration provisions in insurance contracts,” the non-binding provision here is enforceable because it does not deprive the courts of jurisdiction and provides that any arbitration decision is appealable to a “court of competent jurisdiction.”

Background

From Sept. 2, 2021, to Sept. 2, 2022, Philadelphia Indemnity Insurance Company issued a general liability policy to Harper’s Mill Homeowners Association. On June 15, 2022, approximately 15 people claimed that they were injured after coming into contact with pool water on defendant’s premises that contained hazardous chemical byproduct.

Based on an exclusion, plaintiff filed this suit, asserting that it has no duty to defend or indemnify defendant in any underlying lawsuit based on the June 15, 2022, pool incident. Defendant has filed a motion to compel arbitration.

Analysis

The parties agree there is a disagreement between the parties, that there is a written arbitration agreement that purports to cover the dispute that the agreement relates to interstate commerce and that one party refuses to arbitrate the dispute. Therefore, the only remaining issue is whether the arbitration agreement is valid under Virginia law.

Under Va. Code Ann. § 38.2-312, an insurance contract is void when it “[d]epriv[es] the courts of this Commonwealth of jurisdiction in actions against the insurer.” The Fourth Circuit, and more recently, a federal district court, have interpreted this Virginia statute to “void mandatory arbitration provisions in insurance contracts.” In both of these decisions, however, the underlying arbitration agreement was binding.

Defendant argues that the non-binding arbitration agreement here is enforceable under Virginia law because it does not deprive the courts of jurisdiction and provides that any arbitration decision is appealable to a “court of competent jurisdiction.” Defendant emphasizes that the arbitrator would not have exclusive authority to determine any issues in this case, by virtue of the arbitration agreement being non-binding. The court agrees.

To the degree plaintiff argues arbitration is futile or waste of time and resources, that argument fails. “Although non-binding arbitration may turn out to be a futile exercise—because [a party] can ultimately reject an arbitrator’s decision—this fact does not, as a legal matter, preclude a non-binding arbitration agreement from being enforced.”

This is largely because the outcome of arbitration has not been determined, and absent a decision from the arbitrator, a court cannot determine whether non-binding arbitration would be futile. As is the case here, the court cannot say whether non-binding arbitration would be futile, as there is a chance that the arbitrator will rule favorably to plaintiff. As such, plaintiff’s futility argument, to the degree it presents such an argument, fails.

Second, the court is unconvinced by plaintiff’s dilatory argument. Defendant filed its motion to compel within two months of the complaint being filed, about one month after it filed its answer and within three weeks of plaintiff filing its motion for summary judgment. All of this was done during the holiday season.

Although plaintiff accuses defendant of “game playing,” that hardly appears to be the case. This action is in the early stages of litigation, as there has been no initial pretrial conference and no scheduling order in this case. Plaintiff has not demonstrated that actual prejudice would befall it should the court order arbitration.

Defendant’s motion to compel and stay pending arbitration granted.

Philadelphia Indemnity Insurance Company v. Harper’s Mill Homeowners Association, Case No. 3:24-cv-814, Sept. 15, 2025. EDVA at Richmond (Young). VLW 025-3-383. 11 pp.